Transfer pricing adjustments annulled as TPO improperly compared controlled transactions violating Section 92F(ii) requirements

The HC upheld ITAT's decision annulling TP adjustments made by TPO and DRP. ITAT found that while TPO and DRP accepted TNMM as the most appropriate method for ALP determination, they erroneously made additions and exceeded their mandate by re-evaluating raw material costs. TPO improperly compared controlled transactions with other controlled transactions instead of uncontrolled transactions as required under Section 92F(ii). ITAT correctly determined that TPO's directions violated statutory requirements for ALP computation between unrelated parties in uncontrolled conditions. HC found no substantial question of law, confirming ITAT's factual findings and legal interpretation.

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Issues:
1. Assailing the judgment rendered by the Income Tax Appellate Tribunal (ITAT).
2. Determination of Arm's Length Price (ALP) in respect of international and domestic transactions.
3. Adoption of Transactional Net Margin Method (TNMM) for computation of ALP.
4. Alleged errors in adjustments proposed by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).
5. Comparison of controlled transactions with uncontrolled transactions for determining ALP.

Detailed Analysis:
1. The Principal Commissioner filed appeals challenging the ITAT judgment for Assessment Year (AY) 2013-14 and AY 2016-17. The respondent, a company trading polyurethane products, submitted its Return of Income for AY 2013-14. The TPO suggested cumulative adjustments totaling INR 5,62,52,600 under various heads. The Assessing Officer framed a Draft Assessment Order, leading to objections before the DRP and a Final Assessment Order adding INR 5,62,52,600 on account of ALP and INR 37,298 for depreciation disallowances.

2. The ITAT allowed the assessee's appeal, prompting the Principal Commissioner to raise questions regarding the ALP adjustments proposed by the TPO. The ITAT faulted the TPO and DRP for not discarding the TNMM adopted by the assessee. Citing a judgment, the ITAT emphasized that the TPO cannot proceed further without discarding the methodology of the assessee. The ITAT found errors in the TPO and DRP's approach, noting that they compared controlled transactions instead of uncontrolled transactions, as mandated by law.

3. The ITAT criticized the TPO and DRP for broadening the base for arriving at the profit margin and introducing methods outside the rules. It highlighted that the TNMM was deemed the most appropriate method, and any distortions should have been addressed within its framework. The ITAT found the TPO's actions contrary to law and criticized the DRP for affirming them. The ITAT concluded that the TPO's actions were bad in law based on the judgment cited.

4. The ITAT annulled the additions based on a cumulative consideration of the errors made by the TPO and DRP. The ITAT found that the direction taken by the TPO and DRP was contrary to the provisions of the Income Tax Act. The ITAT held that the appeals did not raise any substantial question of law and consequently dismissed them.

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